Stop Buying Stocks | The Market Crisis Just Got Worse
What's up, Grandma's guys? Here, so I know I always preach the age-old sayings of "Buy and Hold." You can't predict the market; time in the market beats timing the markets. The market can remain irrational longer than you could remain solvent, and the stock market is not the economy. But you can't deny that right now there are some wild forces at play that affect all of us as investors, at least in the short term, that are worth discussing.
Because at the very least, it's interesting to learn about it. At the very most, maybe understanding how these work will help make you some money. That's why we gotta talk about exactly what's going on, why the S&P 500 is facing the worst start to the year ever, along with some investing traps that everyone should be made aware of. The truth is, what we're seeing today is very similar to other events that have happened in the past, and by understanding how those turned out, we could be better prepared for today.
But really quick, I just want to mention that the best, most profitable investment that you could make right now in less than a second is the ticker symbol: smash the like button for the YouTube algorithm! In fact, the like button is up over a thousand percent in the last two years just with your help. So thank you guys so much! And also, a big thank you to Wealthfront for sponsoring today's video, but more on that later.
Alright, so for anyone who wants a really quick 60-second, explain-like-I'm-5 version of what's going on in the simplest way possible, here's what you need to know. Because this next minute should tie everything else together and hopefully explain why red is the new green.
First, the Federal Reserve is grappling with higher than expected inflation, leading to fears that they'll have to raise interest rates faster and sooner than expected, which of course threatens us with a second recession. With a lot of short-term uncertainty in the market, investors are plunging their money into safe two-year treasury bills, driving down the yield and causing it to get closer and closer to a signal that typically predicts an economic downturn.
Third, it also doesn't help that at the exact same time we have international tension between Russia and Ukraine. From a purely market standpoint, stock prices don't bode well with uncertainty, and with chip manufacturing coming from both Russia and Ukraine, it's warned that that could further disrupt supply chains, causing prices to rise even higher, leading to fourth, more inflation.
I'm sure you have heard it everywhere that inflation recently clocked in at 7.5 percent, and now the FED President James Bullard says that inflation is out of control and that they should front-load rate hikes as a way to get ahead of rising prices. All of that happening at the exact same time has led us down this rabbit hole of mass selling over the last week, and just recently, the Dow having dropped to its worst day of 2022.
However, when it comes to making money during a time like this, here's what I found very interesting lately. I have become a huge fan of the blog Market Sentiment, which analyzes different ways to profit from market volatility, cryptocurrency, elections, Wall Street bets, and a multitude of other sources. But recently, they analyzed the performance of those who actively buy and sell stocks, and when I saw this, I thought to myself that would be perfect to cover here on the channel because the result is not what you would expect.
By the way, for anyone interested, I'll link to their blog down below in the description. Anyway, for those unaware, day trading is simply the practice of buying and selling out of a stock in a relatively short period of time. It could be anywhere from a few seconds to a few days, but the intention is that you're going to be able to profit from short-term volatility and then post your gains online for imaginary internet points while you drive around a Lamborghini Aventador.
Okay, but seriously, in order to find out how much it could make by trading stocks and the precise strategy that leads to the biggest profits, they benchmarked the performance of more than 83,000 investors on eToro who made more than three trades within a given year, and the results were pretty bad. This graph shows the average profits from each trader over a 12-month span, and at the end of the day, 79.5 percent of them lost money. The median return was negative 36.3 percent. Only one in five people who tried day trading were able to just break even, and statistically, were also nearly just as likely to lose everything.
Another study from UC Davis in 2010 concluded that only 1.6 percent of traders were actually profitable and were even quoted saying that persistent trading in the face of losses is inconsistent with models of rational learning, meaning the more people learn and try to get better, the worse they statistically do. Market Sentiment even cited a 2019 study which found that the more people trade, the more money they lose, with the direct correlation between the number of trading days and the number of losses they rack up, which is pretty bad.
Even though that sounds kind of crazy, the reason behind this is actually pretty simple. First, for many active traders, there tends to be a lack of diversification. Consider this: a finance professor from Arizona State University analyzed the performance of over 26,000 individual stocks since 1926, and he found that the average stock traded for only seven years and lost money. If you thought that was bad, just wait. The most common return for an individual stock over its lifetime was a loss of a hundred percent, and only 48 percent of stocks delivered any positive returns whatsoever.
Not to mention, from those 26,000 stocks analyzed, only a thousand of them accounted for all the stock market profits since 1926, and only 86 stocks out of twenty-six thousand were responsible for half of those gains. Keep in mind, yes, this data included every stock over the last 100 years, which also includes a lot of sketchy penny stocks. So when you look at instead only the largest publicly traded stocks, eighty percent of them made money over a 10-year period, yet still 56 percent of them performed worse than just having invested in the overall index.
Two, overconfidence causes people to trade more aggressively and therefore lose more money. A study published in 2017 found that when day traders were successful, many of them disproportionately attribute their success to ability rather than luck, which ultimately leads them into making riskier investments and ultimately contributing to their downfall.
Three, emotions often get in the way. From my experience as an investor, we all have to manage hope, greed, fear, and regret. Like at first, you're hopeful that you'll make money, but then greed sets in. You start thinking to yourself, "Maybe I should invest a little bit more." And then we're hit with fear of maybe keeping the investment a little longer to make a little bit more profit, or the fear of losing money, which causes you to sell the second it goes down. And then, of course, you have regret. What if you had invested in a stock a little later, or invested in this other stock instead, or maybe it did well, and you regret not having invested even more money, so you do that the next time.
And fourth, of course, you're going to want to justify all the time you spent researching and day trading stocks, which leads people to make riskier profit-driven decisions that end up costing them money. Just consider this: if you're day trading with five thousand dollars and you make a thirty percent return in a year, spending three hours a day every single day trading stocks, that's only fifteen hundred dollars broken down per hour. Those profits are significantly less than you would have made just working minimum wage instead.
This might cause people to make riskier investments in pursuit of making a thousand percent return, and therefore making it worth their time, which of course loses them money. Now, I know you might be thinking, "But Korea, maybe they're just bad investors and have they paid ten thousand dollars for a course by many creators? FX, they would be making profits." But even though it seems reasonable that there are people out there who can consistently defy the odds across a broad spectrum of investors, there's absolutely no evidence out there that more trading leads to better results.
Now, of course, that doesn't mean that it's impossible. We do have funds like the Medallion Fund that outperformed the market for 30 years straight by trading short-term stock positions. But I think trying your luck at becoming that fraction of a percent is just probably not worth it, and you're better off just investing long term and being a boring investor.
However, even though a Buy and Hold approach is the common strategy, what about right now with rising inflation, increasing interest rates, and a potential recession, along with international tensions with Russia and Ukraine? In terms of the current tensions between Russia and Ukraine, even though it's certainly not the most educated on daily updates as far as the overall market is concerned, it is true that, yes, any international tensions will have an effect.
In this case, Rogers was quoted as saying that over 90 percent of semiconductor-grade neon supplies come from Ukraine, while 35 percent of the U.S. palladium is sourced from Russia. In terms of the impact, however, it's a lot larger than what you would expect. Computer chips and semiconductors are integrated into everything from automobiles, computers, phones, video games, electronics, solar panels, or basically anything with a computer.
And that's been partly to blame for the skyrocketing costs of nearly everything that we use on a daily basis. In fact, a survey of more than 150 firms found that supplies had fallen from an average of 40 days' worth in 2019 to just five days' worth in late 2021. However, even though we're not sure exactly how this is going to play out or how quickly companies will start building their own chip manufacturing facilities in the U.S., I was curious how the stock market historically performs during times of geopolitical tensions, and that led me down a rabbit hole into an article posted by Investopedia, who really broke it down perfectly.
They started research from LPL Financial, who found that the stock market, on average since 1941, saw a drop of 5 percent with an average recovery time of 47 days. It's also interesting that from the start of World War II in 1939 until it ended in 1945, the Dow was up a total of 50 percent or more than seven percent a year.
On top of that, they mentioned that the Swiss Finance Institute found that the increased likelihood of a war decreased stock values more than the actual war itself. They called that the "war puzzle" because there's no clear explanation why stocks increase once war breaks. After a prelude, some theorize that stocks react worse to uncertainty than they do to the actual event itself, but I say in more simpler terms: nothing makes sense.
And that is why we got to talk about this piece of data right here. Now, normally I'm a huge fan of that buy on a regular basis and hold strategy, but this article took it to a whole new level that I never even knew existed. Let me explain: this analysis takes on two completely different approaches. One invests a hundred dollars into the market every month over 40 years, and the other saves a hundred dollars a month and invests it precisely at the exact bottom every single time between market highs.
So it seems like there would be a clear winner between the two, right? Well, actually, wrong. In fact, the person who invested at the bottom underperformed the market 70 percent of the time. Well, throughout history, waiting for a market crash and holding cash only worked prior to the 1940s, and after that, there was the missed opportunity cost of waiting for too long to enter the markets while it continued to move even higher.
In fact, missing the bottom by only two months lowers the chance of outperforming dollar-cost averaging from 30 percent to three percent since 1970. As you can see here, the red dots plot every single dip buying opportunity at the market low compared to its previous high, showing that over time, your overall return declines the longer you wait. Schwab also did a similar study and analyzed what your performance would be like if you invested at the exact bottom every single year over 20 years. Surprisingly, that only averaged a one percent higher return annually than someone who just bought randomly every single month.
Now, unfortunately, I could not find any studies that would simulate what it would be like to ride the market to the very top, sell, realize a taxable event, then buy in at the precise bottom. But it does appear for most people, unless you need the money in the next five years or need to rebalance your portfolio, chances are you should just do absolutely nothing.
So that's why, even though my portfolio is down about nine percent so far this year, honestly, it doesn't matter. As interesting as it is to keep up with everything that's happening on a daily basis, for me, the investment strategy doesn't change. That's why, after a while, investing just becomes really repetitive. There's only so many times you could talk about dollar-cost averaging into the market because chances are what works today is still going to be working for the next 50 years for the average investor.
Now, we don't doubt that there are people out there who could beat the markets, but they're the exception, and you're usually not going to know how well they perform until well after the fact, at which point it's too late to go back in time. So that's my boring, simple investing strategy that still is just as repetitive as ever. To me, it's still very important to stay up to date with current events, but I think anything could happen. That's why I like to focus on the things that I direct or control, like how much money I save, whether or not I invest consistently, whether or not I live below my means, if I work out for 30 minutes every single day, and whether or not I subscribe if you haven't done that already.
And also, don't forget to check out Wealthfront down below in the description because they have an assortment of index funds and ETFs free to choose from if you're interested. So thank you guys so much for watching! Also, make sure to add me on Instagram and to my second channel, The Graham Stefan Show. I post there every single day. I'm now posting here, so if you want to see a brand new video from me every single day, make sure to add yourself to that. Thank you so much for watching, and until next time!